BlackRock Slows Junk Bond Buying Binge

BlackRock, the world’s biggest money manager by assets, is slowing its purchases of high-yield U.S. corporate bonds after a sharp rally, but the firm’s top fund manager still holds a rosy longer-term outlook for this year’s star of the fixed income market.

The enthusiasm for so-called “junk” debt reflects BlackRock’s view that policy actions from major central banks and European officials have significantly reduced systemic risks since the second half of 2011.

Investors sharing this upbeat view have flocked back to risky assets after a broad market rout late last year. U.S. stocks have traded back to their highest level since 2008, while the yield premium on junk debt over safe-harbor Treasury bonds have dropped sharply.

“I still see long-term strength for [junk debt and leveraged loans], but the rally has been significant over the past few months and any market volatility could push yield spreads wider, presenting a better entry point,” said Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock, in an interview with Dow Jones Newswires.

“We have been orienting our positioning towards higher-quality segments of the high yield sector and leveraged loan market,” said Rieder. Meanwhile, Rieder added that he is “modestly short” Treasury bonds. A short is a bet wagering on bond prices to fall.

BlackRock has $3.5 trillion global assets under management, a size much bigger than the balance sheet of the Federal Reserve. Of the amount, $1.24 trillion is in fixed income assets, making it a significant player in the global debt market.

Even with the decision to cut back on its junk debt buying, BlackRock’s stance stands in stark contrast to the positions of its main rivals. Key among them is Pacific Investment Management Co., whose founder and co-chief investment officer Bill Gross has in recent months focused his energy on gobbling up longer-dated Treasury bonds and mortgage-backed securities.

For now, dabbling in junk debt has proven to be the better bet. U.S. high-yield bonds have handed investors a return of 5.16% this year through Monday, compared with a small loss of 0.8% on Treasury bonds, according to data from Barclays.

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